Joint and Several Liability

Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

Joint and Several Liability Meaning

Joint and Several Liability refers to conditions in a contract that are legally enforceable under which two or more people are jointly and individually liable to make good to the other party the same thing as enforced in the contract between them. Contracts entered between parties predetermine their liability towards each other in different situations.

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In other words, in the case of any breach of contract conditions, the grieved party to the contract can sue the other party (comprising two or more persons) either individually or jointly for discharging the joint and several liability clause. It is a tort action that can get the parties involved in penalties or charges by the court.

Key Takeaways

  • Joint and several liabilities are terms in a legally enforceable contract under which two or more people are jointly and individually responsible for making good to the other party imposed in the agreement between them.
  • The contracts between parties destine the liability towards each other in distinct conditions.
  • It exists because it is difficult to hold any person responsible for the agreement term’s non-fulfillment in particular contracts.
  • This clause is advantageous as it helps the plaintiff get justice and repayment for the loss. Therefore, this agreement also results in quick dispute solutions between the parties.

Joint And Several Liability Explained

Joint and several liability results in the claimant suing for discharging liability arising from the contract from the other party (two or more persons) individually or jointly. Let’s explain this with the help of a hypothetical example.

ABC LLP firm comprising three partners, Mr. A, Mr. B, and Mr. C, agreed with Mr. Black to handle exclusive event management. The Agreement entered into between ABC firm and Mr. Black clearly states that in the event of any damages arising during the conduct of the said agreement, ABC LLP firm and its partners will be jointly and several liable to discharge the damages.

While executing the event management for one of the events of Mr. Black, a large fire took place, resulting in damages to the backstage artists as well as to Mr. Black, resulting in total claims of $100000. Mr. Black filed a claim against ABC LLP and its partners for the same. In this case, ABC LLP and its partners individually and jointly will be held liable, and Mr. Black can individually also claim damages from any of the partners.

Every contractual agreement between two parties involves discharging certain terms as part of the Agreement, and no discharging of the same gives rise to Liabilities. It is a double-edged sword. In a way, it helps Plaintiff recover the damages from any partner or all depending upon the parties’ financial capacity.

Also, at the same time, it makes the other party well aware that Agreements entered into should be taken seriously, and non-fulfillment cannot be rescued under the aegis of Entity structure. Personal accountability will make good any loss incurred by the other party.

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Purpose

Let us understand the purpose of a joint and several liability agreement and how it can prevent partners or parties involved in a situation where both their best judgment is in question through the discussion below.

Why Does It Exist?

Joint and Several liability clause exist because it has been observed in many instances that it is difficult to hold any particular person liable for the non-fulfillment of agreement terms in certain contracts. Also, it has been observed many times one of the parties files for bankruptcy, leaving the plaintiff without an adequate claim and other members get a shield. With this, the plaintiff can file suit against that member who can meet the claim, and subsequently, the member can claim the share of the other members, and the plaintiff receives the adequate claim and is not left in the lurch.

Examples

Let us understand the concept of joint and several liability agreement with the help of a couple of examples.

Example #1

Ray and Sherry married each other and took a Housing Loan from True Value Bank for $100,000. The Loan Agreement clearly states that both are jointly and severally liable for the said liability. At the time of Loan’s ailment, Ray worked full-time, and Sherry studied for her Masters.

After two years, due to the financial crisisFinancial CrisisThe term "financial crisis" refers to a situation in which the market's key financial assets experience a sharp decline in market value over a relatively short period of time, or when leading businesses are unable to pay their enormous debt, or when financing institutions face a liquidity crunch and are unable to return money to depositors, all of which cause panic in the capital markets and among investors.read more, Ray lost his job while Sherry started her venture through the huge amount she received from her grandparents as part of their family wealth distribution. Due to Ray’s non-payment of Housing loan dues, the Bank filed its claim, and the court decided to recover the same from Sherry as Ray was completely bankrupt and Sherry had meaningful resources to repay the debt.

Thus, we can see how it facilitates the plaintiff (Bank) to pursue recovery quickly and most effectively.

Example #2

The Permanent Court of Arbitration (PCA) of Switzerland in September 2022 dismissed a case as there was no conclusive evidence to enforce action against the two partners.

The case originated from an agreement between two investors and the Czech Republic. The Czech Republic representatives presented facts and documentation about the investors not meeting the terms of the agreement and claimed 1.75 million USD and 178,125.50 in GBP.

However, upon further investigation and inquiry, it was found that the two partners did not declare and a joint and several liability towards the project. Therefore, these claims could not be awarded in the favor of the claimant.

Advantages

Let us understand the advantage of incorporating a joint and several liability clause in an agreement through the discussion below.

  • One of the most important reasons that strongly goes in favor of this clause of Joint and Several Liability is that it enables Plaintiff to get justice and compensation for the loss suffered. Normally it is observed due to the Limited Liability company structure, and partners shield themselves from negligence due to the non-fulfillment of Agreement terms. Through it, the Plaintiff can ensure that the claims are made good by making those parties to the contract individually liable who have deep pockets and the ability to pay compensation.
  • It results in speedy dispute resolution between parties. Once liability is determined, it can be claimed proportionately or outright from a partner who is competent to pay in full ( in the case where other partners are insolvent or lack financial means).

Disadvantages

Despite several advantages mentioned above, there are factors from the other end of the spectrum that act as hurdles or hassles in the process. Let us understand the disadvantages of a joint and several liability agreement through the explanation below.

  • One of the most important reasons Joint and Several Liability is criticized is that it doesn’t lead to liability proportionate to the parties’ fault. In other words, in a dispute, suppose there are three defendants and one of them is majorly responsible for the damages suffered by the plaintiff but doesn’t have the financial means to make a good Plaintiff suffer the loss. There is another defendant with no involvement but with good financial capacity.
  • Due to Joint and Several Liability clauses, Plaintiff can directly sue the defendant with the good financial capacity to make good all the losses suffered by Plaintiff.

Frequently Asked Questions (FAQs)

What are the arguments against joint and several liability?

The joint and several liability principles opponents argue that its usage is biased to innumerable defendants. In addition, it may lead to instances in which a party with less responsibility for a plaintiff’s injury may unjustly be burdened with paying all the damages.

Who does joint and several liabilities apply?

Joint and several liability apply to defendants jointly responsible for the same harm or injury caused to a plaintiff. For example, suppose in some states, any defendant partly accountable for the cause of the injuries can compensate the plaintiff for 100% of the damages. Moreover, the defendant can look for contributions from other defendants.
This liability can also apply when two parties to a contract make joint and separate promises to meet specific needs.

What are defenses to joint and several liability?

The defendant can raise a few defenses to be joint and several liabilities. It includes comparative negligence, contributory negligence, assumption of risk, necessity, self-defense, and bars to the restraint statute.

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